- Chinese real estate company Evergrande is struggling to pay off its $ 300 billion debts.
- It shocked global markets last week, although stocks subsequently stabilized.
- Goldman Sachs analysts identify 4 indicators to determine the state of the Chinese real estate sector.
Evergrande made headlines last week when it emerged that China’s second-largest real estate developer had total liabilities of $ 300 billion and was on the verge of a series of defaults.
Western investors felt the effects within a day, with the S&P 500 down 2.4% and the Dow Jones falling more than 800 points. Both bitcoin and ether have collapsed by more than 5%.
Evergrande’s default could hit foreign investors like BlackRock and Allianz, and even blow up the entire Chinese real estate market. Some bear market insiders have called the debt crisis a potential “Lehman Brothers moment”, although most analysts have played down such concerns.
Goldman Sachs has launched a new tracker that uses four key barometers to gauge market development and sentiment in the Chinese real estate market, which the bank estimated at $ 52 trillion in 2020.
“The Chinese real estate market has recently been one of the focus of global investors,” said Yi Wang, executive director and senior advisor at the bank. “[We will] try to grasp the nuance of moves that could potentially become an inflection point during a very difficult industry in deleveraging progress. “
Insider breaks down Goldman Sachs’ four metrics to help investors judge the overall state of Evergrande and the broader market.
Goldman Sachs tracks sense of land investment, which measures the overall attitude of investors towards the sector. It is calculated by combining the ratio of the premium to the land transaction price and the land auction failure ratio.
“Slow investment often attracts the attention of policy makers and can lead to policy loosening,” Wang said. “Ratios are two key indicators that have triggered changes in government policy in the past.”
The bank noted that the land premium ratio had reached an all time high, while the auction failure rate had reached an all time high. As land sales represent between half and 60% of tax revenue for most Chinese cities, this suggests that the Chinese government may have to step in to inject
in the market.
Refinancing trends can also serve as a barometer of the overall health of the real estate market. The bank used the latest commercial paper discount rates and offshore yields of some Chinese real estate bonds to assess this measure.
“Commercial invoice discount rates have increased from single digit to teenage level for our covered developers since the end of the first quarter,” Wang said. “[This was] primarily driven by a rapid surge in the rates of some highly leveraged names amid growing investor concerns over their cash flow pressures. “
“The yields of many property names in China have increased and set new highs,” she added. “We attribute the lower prices to negative news feeds from Evergrande and concerns about other highly leveraged developers.”
Again, this suggests an overall lack of liquidity in the real estate market, which could prompt the Chinese government to intervene.
Finally, the bank measured two trends in the housing market: the sale rate for new properties and Centraline Sellers Index (CSI). The first assesses liquidity by considering the disparity between homes built and homes sold, while the second measures broker confidence in future sales.
“Several high-profile cities have reported sales declines,” Wang said, pointing to Wuhan, Wuxi and Xi’an. “The CSI for the five major cities was down 13.9 points year-on-year, and we are seeing the CSI approaching all-time lows.”
The data therefore indicates that fewer properties are selling and sellers are becoming more bearish. This could indicate a long-term stagnation in the Chinese real estate sector.